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R&D in the Presence of Network Externalities: Timing and Compatibility

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  • Eirik Gaard Kristiansen

Abstract

Two rival firms decide on the time of R&D and whether the new products should be compatible. I show that network externalities may induce the firms to introduce new incompatible technologies early, which is socially harmful as the R&D costs increase, and de facto standardization becomes less likely. Compared with the equilibrium outcome, both firms may gain by delaying the introduction of incompatible technologies. By agreeing on common standards before product introduction, entry is delayed and profit may increase. An ex post optimal standardization policy may increase the incentives for early product introduction and consequently be an undesirable policy ex ante.

Suggested Citation

  • Eirik Gaard Kristiansen, 1998. "R&D in the Presence of Network Externalities: Timing and Compatibility," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 531-547, Autumn.
  • Handle: RePEc:rje:randje:v:29:y:1998:i:autumn:p:531-547
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    Cited by:

    1. Slivko, Olga, 2012. "Direct and indirect subsidies in markets with system goods in the presence of externalities. Preliminary version," Working Papers 2072/211631, Universitat Rovira i Virgili, Department of Economics.
    2. Christian Dahl Winther, 2007. "Optimal research effort and product differentiation in network industries," Economics Working Papers 2007-19, Department of Economics and Business Economics, Aarhus University.
    3. Heli Koski & Tobias Kretschmer, 2004. "Entry, Standards and Competition: Firm Strategies and the Diffusion of Mobile Telephony," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(1), pages 89-113, November.
    4. repec:eee:ijrema:v:27:y:2010:i:1:p:4-15 is not listed on IDEAS
    5. Maarten C.W. Janssen & Ewa Mendys, 2000. "Adoption of Superior Technology in Markets with Heterogeneous Network Externalities and Price Competition," Tinbergen Institute Discussion Papers 00-087/1, Tinbergen Institute.
    6. Mili Naskar & Rupayan Pal, 2016. "Network externalities and process R&D: A Cournot-Bertrand comparison," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2016-020, Indira Gandhi Institute of Development Research, Mumbai, India.
    7. Heli Koski & Tobias Kretschmer, 2004. "Survey on Competing in Network Industries: Firm Strategies, Market Outcomes, and Policy Implications," Journal of Industry, Competition and Trade, Springer, vol. 4(1), pages 5-31, March.
    8. Kang, Jin-Su & Downing, Stephen, 2015. "Keystone effect on entry into two-sided markets: An analysis of the market entry of WiMAX," Technological Forecasting and Social Change, Elsevier, vol. 94(C), pages 170-186.

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